Thursday 8 May 2008 10.45 EDT
First published on Thursday 8 May 2008 10.45 EDT

It is 2 metres (7ft) tall, 1.5 metres wide and a metre deep. It runs on water and most of the time it is screened off at the back of a lecture room in Cambridge. But when the nine members of the Bank of England's monetary policy committee announce their latest decision on interest rates today they will owe a debt of gratitude to the computer built in a garage in south Croydon by Bill Phillips - an engineer turned economist from New Zealand - almost 60 years ago.

A sensation when it was unveiled at the London School of Economics in 1949, the Phillips machine used hydraulics to model the workings of the British economy but now looks, at first glance, like the brainchild of a nutty professor. Where the Bank's team of in-house economists are equipped with state-of- the-art digital computers, the profession's first stab at modelling was very much a do-it-yourself affair with a whiff of the Heath Robinson about it.

The prototype was an odd assortment of tanks, pipes, sluices and valves, with water pumped around the machine by a motor cannibalised from the windscreen wiper of a Lancaster bomber. Bits of filed-down Perspex and fishing line were used to channel the coloured dyes that mimicked the flow of income round the economy into consumer spending, taxes, investment and exports. Phillips and Walter Newlyn, who helped piece the machine together at the end of the 1940s, experimented with treacle and methylated spirits before deciding that coloured water was the best way of displaying the way money circulates around the economy.

Phillips was a far cry from today's identikit economists, with their mathematical training and obsessions with abstruse theory. He was born on a farm in New Zealand in 1914 and spent much of the second world war in a Japanese prisoner of war camp after being captured while trying to turn a wrecked bus into a boat to sail to Australia. While imprisoned, Phillips risked death by stealing components from the camp commandant for a makeshift radio and built an immersion heater that was capable of providing 2,000 PoWs with a cup of tea before bed. The Japanese never worked out why the lights dimmed every night at 10pm.

By today's standards, the Phillips machine was limited. It made no provision for inflation and, with capital controls in force, had no need to take account of the curse of the modern UK economy - the wild swings in the credit cycle. Professor Brian Henry, a visiting fellow at the National Institute for Economic and Social Research, said: "It was a child of its time. It looked at how the economy could be stabilised when people were worried about the stabilisation of aggregate demand. That is the way things were in the 1950s.

"Things are different now. There is a different financial system and a completely different global economy. But Phillips was a brilliant guy. He came up with interesting ways of providing practical advice on policy."

Even so, Henry says the machine is far more than a museum piece. Today the Bank of England's models are supposed to show how shocks affect the economy and the time it takes for a change in policy to have an effect, precisely the sort of problems that the Phillips machine helped identify. Even with the most up-to-date computers, the Bank is still finding it hard to come up with the right answers.

Indeed, one early demonstration of the machine displayed the difficulties that can arise when monetary and fiscal policy are not synchronised. Phillips asked one of his students to be chancellor of the exchequer and control taxes and spending; the other to be governor of the Bank and control interest rates. Predictably, the policies were uncoordinated and the upshot was that water overflowed on to the floor.

Out of fashion

By the mid-1950s, the Phillips machine was all the rage and after struggling to get a pass in his original subject, sociology, Phillips eventually became a professor of economics at the LSE after demonstrating a relationship between the rate of unemployment and wage inflation. But as the Phillips curve fell out of fashion after the monetarist backlash of the 1970s, so the machines were mothballed and the one housed in the department of applied economics at Cambridge is the only working model left in the country. It took a lecturer from the department of engineering, Allan McRobie, to get it up and running again; no economist could work out quite how Phillips had pieced the original machine together.

McRobie was given a grant from Nesta - the National Endowment for Science, Technology and the Arts - and spent a summer on the restoration project. The only difference with the original is that McRobie has dispensed with the cochineal because it would stain the Perspex. "Everything was in the wrong place. It had been here since the 1950s but everything was connected wrong. I had to work out what he was trying to do. Economics is run by people who didn't understand it."